Will the British Rich Stop Giving?

By Robert Frank

The U.K.’s new budget has ignited all manner of class warfare. Retirees say it’s a gift to the rich at the expense of the poor. The wealthy say it’s another attack on success and job creators.

But one piece has gone largely unnoticed: the limit on philanthropic giving. The measure would cap the tax relief for wealthy givers at 25% of their annual income, or £50,000, whichever is higher. It takes effect next year.

It’s similar to the Obama proposal, which would limit charitable deductions for high earners to 28% for couples with incomes of $250,000 or more or individuals with income of $200,000. The White House says limiting itemized deductions would shrink the deficit by $584 billion over 10 years.

The U.K. expects its measure (along with caps on business deductions) to result in $490 million in saved revenue.

“Giving shouldn’t mean you pay no tax,” according to the U.K. Treasury.

Yet charities say the plan would put a chill on philanthropic giving just as the U.K. government is trying to create a new culture of giving.

The government has waged a massive PR campaign in the past two years to get the British wealthy move toward the American culture of philanthropy. Last year, Prime Minister David Cameron released the “Giving White Paper” which aimed to “renew Britain’s culture of philanthropy by working with charities and businesses to support new ways for people to contribute which fit into busy modern lives.”

It included millions in government support for charity groups, research and committees.

The new tax, say many charity groups, rolls back the efforts. The new limits will be especially damaging to people who make a one-time gift of more than half of their wealth to a foundation — which the wealthy often do for estate planning.

“People should not have to pay tax on money they have given away for the public benefit,” said Chris Lane of the Charity Tax Group, quoted in the Third Sector magazine.

Comments (4 of 4)

There are a couple of elements that bear examination here. The first is the impact of taxes on giving generally and the second is the differences in the "culture of philanthropy" between the US and the UK. With respect to taxes, US surveys have consistently shown what individual major gift fundraisers and donors know to be true: tax implications are the least important consideration in making a gift. How and when may be affected, of course, but not whether. That matter is decided based on a combination of commitment to the cause, the relationship to the solicitor, the appropriateness of the project, the timing of the ask and the availability of capital. These characteristics are likely true in the UK as well. What is clearly different is the "culture". And by this I do not mean the culture of "giving"--the British are just as generous as anyone else on Earth--but rather the culture of "asking". It is in this area that the United States is distinctly different from any other place in the world, although our practices and methodology have been catching on over the past two decades in Canada, the UK, Australia and now Europe, Latin America and and Asia as well. We have a systematic, donor-focused and sales orientated approach, based on staffing and solicitation metrics, that allows us to successfully engage in large goal capital campaigns which fully embrace the needs and interests of philanthropic investors. In short, we "ask". And, in asking, we implicitly share some level of control over the process and the outcome. This is not brain surgery, but it's not an easy cultural chasm to leap either. British fundraisers have been making that transition for some time now and they deserve great credit for their achievements to date. The greatest reward in all this will come from the increased independence and autonomy of charitable institutions funded in larger part by communities and the empowerment of individual donors who will finally be given the opportunity to do make the wealth they have amassed more meaningful by investing in the community in ways that will long outlive them.

6:32 pm March 27, 2012

David S Lesperance wrote :

My Golden Geese clients already have enough money to maintain their lifestyle from the austere to the ostentatious. They also have no problem paying for government services that they receive or for which they are eligible but do not receive (eg. welfare). What they are looking at is the money over and above this amount ("the excess") and who controls were it goes or how it is used.

The real debate in their minds is whether they as the generators of this excess should control how it is used or whether this is "community property" which others should have control over. While some of my clients want to maintain all or some of this excess for their heirs, I would have to say that the vast majority are far more interested in leaving a legacy through strategic philanthropy.

If a government taxes this excess, then the Golden Geese rightly label this as forced charity. Which they then feel entitled to ask how this money is used and how efficient government operates as a charitable vehicle. Their overwhelming conclusion is that it is not a terribly efficient or effective means of strategic philanthropy. That is why they create foundations or make large donations to charities that they feel are efficient and effective in the areas where they feel is the most pressing need.

If the UK and/or the US decides to limit this control over the excess by putting a limit on charitable contributions, do not be surprised if the Golden Geese decide to take steps such as expatriation in order to regain control. As I have endlessly pointed out in my posts, when this natural behaviour occurs, the government tax revenue will take a dramatic hit, since they will no longer contribute ANY future tax revenue (including that which they were previously content to pay for government services). With a tax revenue model which is dangerously over reliant on a small number of taxpayers for a huge portion of its total tax receipts (top 1% contribute over 40% of the revenue), the natural results would be devastating.

3:40 pm March 27, 2012

TiredOfFlippingTheBill wrote :

Interesting idea, but I think foolish. If you read my other posts you will be familiar with the fact that we do a lot of tax free investing (won't go into details again here). Say I pull a John Kerry and only make $200K of taxable income. I can only give away $56K and get a tax break. The rest of what we would have donated will not be given.

This would definitely cause us to give our wealth to the children instead of giving it away -- which is the current plan.

12:57 pm March 27, 2012

Economic Thinker wrote :

This is an example of governments getting greedy. They are already wasting the people's money, and now want more of it to waste and to pay themselves. This ultimately hurts charities and society more than anything, as a cut of the donation will go to the government instead of to a good cause. Governments are spiraling out of control with excessive spending. They need to STOP being greedy and start being more efficient with resources. I don't see a bright future if things keep continuing down this path.

About The Wealth Report

The Wealth Report is a daily blog focused on the culture and economy of the wealthy. It is written by Robert Frank, a senior writer for the Wall Street Journal and author of the newly released book “THE HIGH-BETA RICH.”